Photo: Aniruddha Chowdhury/Mint
A fiscal deficit occurs when a government’s total expenditure exceed the revenue that it generates, excluding money from borrowings.(From RBI and orther forms)
IN OTHER WORDS: Fiscal deficit is – If government expenditure is higher than the revenue it generates.
(High fiscal deficit = slow economic growth)
They are two policies in fiscal deficit:
1. monitory policy: which is controlled by RBI the Supply of money in economy & Rate of interest.
2. Physical policy: Monitored by government which looks total expenditure and revenue of the government
If government wants money then it borrows money from RBI. In order to give money to government, RBI has to print more money.
Printing more money > increases supply of money = Higher inflation = High interest rates(controlled by RBI) = Higher interest payments = Slow Economic Growth = High fiscal deficit = High govt borrow money = Higher rate of interest which leads to Slower economic growth.